CPG Products Corp. v. Mego Corp.

1981 U.S. Dist. LEXIS 17657, 214 U.S.P.Q. (BNA) 206 (S.D. Ohio
1981)

[*1] Spiegel, District Judge.

I.

This is a civil action for patent infringement under Title 35, U.S.C., and
for unfair competition under the statutory and common law of the State of
Ohio. The matter is before the Court on plaintiff's motion for a preliminary
injunction based on its claim of unfair competition.

Plaintiff, CPG Products Corporation ("CPG"), is a Delaware corporation having
its principal place of business in Minneapolis, Minnesota. Defendant,
Mego Corporation ("Mego"), is a New York corporation having its principal
place of business in New York City. The subject matter of both the
infringement and unfair competition claims is a stretchable toy figure or
doll which consists of shaped, elastic skin filled with concentrated corn
syrup.

In its unfair competition claim, CPG charges Mego with having misappropriated
[*2] trade secrets concerning the development of the commercial process
by which the doll is manufactured, so that Mego could develop the same type
of product and place it in competition with Kenner's product line. CPG's
development and manufacture of the doll, and Mego's alleged misappropriation
of trade secrets from CPG concerning the doll, occurred primarily through
the operations of CPG's Kenner Products Division which is headquartered
in Cincinnati, Ohio.

II.

In June and July of 1980, CPG received information that Mego was planning
to export technology to Mexico which related to the manufacturing process
which it used for its stretchable, toy figures. As the instant action
was then pending, CPG moved for and was granted by this Court a temporary
restraining order which prohibited Mego from negotiating for the purpose
of exporting or in any way transferring or conveying technical or financial
information relating to the manufacturing process of Mego's elastic products,
pending the outcome of the instant case.

CPG subsequently filed the instant motion for a preliminary injunction seeking,
in addition to the same restraints on Mego as outlined in the temporary
restraining order, [*3] a broader prohibition against Mego which
would ban it from manufacturing or selling elastic toy produces . . . .

The motion came on to be heard on July 10, 1980, on the testimony of witnesses,
the numerous exhibits submitted by both parties, including the depositions
of more witnesses, the memoranda, and the arguments of counsel.

III.

The doll, which Kenner Products Division began marketing in 1976, is an
elastic toy [*4] filled with concentrated corn syrup which can be
stretched or moved from one position to another, and, when released, will
slowly return to its original shape or position as the elastic skin reacts
against the highly viscous filler. Kenner marketed these toys, known
as "Stretch armstrong," "Stretch Monster," "Stretch Octopus," "Stretch Serpent,"
and "Stretch X-Ray," from June 1976 to January 1979. The toy was extremely
successful commercially, accounting for sales of over fifty million dollars
during that period. Kenner manufactured these dolls through late 1979
and still offered them for sale in its 1980 catalogue, but it has since
discontinued sales of these items. An application for a patent on
the toy was applied for in March of 1976 which finally issued in October,
1979 as U.S. Patent No. 4,169,336.

In April 1979, Mego began marketing a line of elastic toy dolls which also
consisted of shaped, stretchable skins filled with a concentrated corn syrup.
Mego's dolls were marketed in two categories: large dolls the same
size as Kenner's, known as "Elastic Hulk," "Elastic Superman," "Elastic
Plasticman," and "Elastic spiderman," and, beginning in the Spring of 1980,
smaller [*5] dolls in the figures of elastic Disney characters and
"Elastic Casper." Through July 1980, Mego's net profit on these items
has been in excess of [specifics deleted]. However, as of July, 1980,
Mego had also considered the possibility of discontinuing the manufacturing
of its elastic toys because of the performance of the product in the market
place.

IV.

The original idea for Kenner's stretchable doll figures was conceived by
a CPG employee named James O. Kuhn in January 1974. He developed his
idea through experimentation and design until he was able to present a prototype
of the figure to Kenner for evaluation in February 1975. Kenner accepted
the item for commercial development and began working on the process by
which it could manufacture such figures on a mass production scale in March
1975.

Kenner's first consideration was to find a process by which it could concentrate
the corn syrup filler in its commercial manufacturing process to get the
desired feel and play value for the doll. Kenner personnel experimented
with Kenner then narrowed its search to two suppliers, thoroughly evaluating
one before finally settling on. Then, once a decision was made to
use a particular [*6] model, Kenner worked further with the supplier
to modify that model so that it would handle the particular requirements
of Kenner's manufacturing process which involved the stretch figures.

Another major area of process design and development at Kenner involved
the selection of equipment and procedures for filling the skins with the
concentrated corn syrup. Again, after much consideration and evaluation,
Kenner selected [specifics deleted] as its supplier of filler equipment.
In conjunction with the filling process, Kenner decided to use a.
[specifics deleted]. Thus, the development of Kenner's doll and its
commercial manufacturing process, from the inception of the idea to actual
commercial production, covered a period of two-and-a half years. January
1974 to June 1976.

* * * [*8] * * *

[Kenner claimed thirty-four items in combination as trade secrets or confidential
information, but Mego argued that most production-line components were
standard equipment, commercial information on the use of which known outside
of Kenner, so that the items "individually or in combination did not rise
to the level of trade secrets." Mego also argued that it took Kenner
only eleven months, from July of 1975 until June of 1976, to develop and
implement the production line.]

[I]t is possible that a new combination of known steps or processes can
be entitled to trade secret protection. . . . Although Kenner used
standard equipment in its process for manufacturing the stretch doll, it
used this equipment in a combination of steps and for a purpose which it
had not previously been envisioned. The manufacturers of the equipment
Kenner utilized were each appointed by Kenner for information regarding
the ability and capacity of a machine to be used in the manner necessary
to make a stretch toy, and the companies Kenner considered before deciding
on the ones used were evaluated on their ability to aid Kenner in the design
of a production line for the specific toy, the stretch doll, and to solve
problems in regard to that line. Thus, the equipment was utilized
in a manner and for an ultimate purpose which had not previously been contemplated,
[*9] with adjustments to accommodate it to Kenner's specific project.
Kenner solved problems in the process itself by designing [specifics
deleted] all compatible with the production requirements.

The key to the production line was not the equipment utilized but finding
equipment which would do the job at each stage of the process. The
Court finds that Kenner's cost data, [specifics deleted] the combination
of the equipment comprising the production line to produce a stretch doll
were not matters of common knowledge at the time Mego appropriated and used
them. * * *

Furthermore, Kenner itself considered the production process and the combination
of equipment used in it to be confidential. Kenner's Oakley facility
where the production [*10] line was housed has been fenced in at
all relevant times. Access to the facility has been restricted to
a limited number of gates; "no trespassing" signs have been posted on the
premises; and up to fourteen guards have been employed at the facility,
and Kenner's hourly employees have been provided with written rules and
regulations which prohibit them from being on the premises except for work,
require them to stay at their assigned duty station, and prohibit unauthorized
possession of company property. Kenner's salaried employees have been
required to sign employment agreements whereby they agree to safeguard Kenner's
confidential information. Kenner employees have been required to wear
or carry identification cards. Access to the plant by non-employees
has been restricted to visitors who state that they have business with a
particular Kenner employee, and guards have screened those persons seeking
to enter the plant to ascertain that they do have business there.

Those suppliers or prospective suppliers who have been shown Kenner's production
line or been informed of aspects of Kenner's process have been so shown
or so informed for valid business reasons and have been cautioned [*11]
that the information and process constitute confidential information of
Kenner. Kenner purchase orders used to purchase items of equipment,
[specifics deleted] recite that all information disclosed pursuant to the
order is confidential and shall not be disclosed to any third party.

The entire production line, processes, and equipment have been considered
confidential by those persons responsible for it and have been treated as
confidential information. The operating manual was reproduced in very
limited quantities and distributed only to persons entitled to know its
contents as part of their job responsibilities.

The Court finds that these measures taken by Kenner were reasonable and
appropriate to protect its confidential information.

* * * [*12] * * *

In addition to the facts just discussed concerning the novelty and the confidentiality
of Kenner's production line, Kenner has established facts which persuade
the Court that Mego went to great pains to acquire this information from
Kenner to aid in the production of Mego's own stretch toys, rather than
acquire the information as Kenner did, through trial and error in the marketplace.

V.

* * * [*19] * * *

[The court describes in detail how Mego acquired the idea and production
technology for its own dolls. The project began when Nagel-Kennedy
& Associates, an independent "idea house" that worked for Mego and other
toy makers, suggested that Mego make stretchable dolls, instead of its
existing unstretchable dolls, in the form of superheroes. Mego
had no free personnel to design the production line, so Nagel-Kennedy
promised, in exchange for royalties, to find others to design it.

Neither Mego nor Nagel-Kennedy ever "seriously tried to locate an independent
consulting engineer." Nagel-Kennedy first approached an existing
employee of Kenner, who refused. Then it found Boegli, an ex-employee
of Kenner who had left under "unpleasant circumstances" and had no job.
Boegli accepted, ultimately producing a detailed memo describing
Kenner's production line and costing in detail.. Boegli charged
$1,500 for his memo, then later wrote a second memo based on information
from Woodward, his contact inside Kenner.

One Abbat also served Boegli as a source of information from Kenner,
but it was not clear whether he was the source of the information in
Boegli's initial memo. Rotenberg , the Mego executive who worked with Boegli
and used his information, was aware that it came from Kenner and "never
instructed [Boegli to get the information] only by appropriate methods."

Boegli continued to furnish Mego information on Kenner's production
line and costing for a period of about one-half year, going so far as
to try to obtain a copy of Kenner's patent application for the stretchable
dolls.
When he was unsuccessful, Rotenberg asked him why he had not provided
the application. (This all occurred at a time when there was no
pre-issue publication of U.S. pending patent applications, which were
required by statute to be kept secret. See 35 U.S.C. § 122 (1990).)

At one point Mego tried to hire Boegli and Abbot to supervise Mego's
production of the stretchable dolls. Abbott refused for personal reasons but
appeared willing to continue to cooperate while a Kenner employee. Boegli
continued to work for Mego another month or so, being paid directly, until
he quit or was fired. During that time, Boegli produced a detailed
and highly confidential cost sheet on Kenner's production, which was circulated
among a number of Mego executives.]

Based on this evidence, the Court finds that Mr. Boegli intentionally sought
out and improperly obtained important and valuable confidential information
of Kenner's which related to its manufacture of its stretchable toy figures.
Mr. Boegli acted as a conduit [*20] by which this information,
as well as information he received while he was employed by Kenner, was
improperly conveyed to Mego. Both Messrs. Woodward and Abbat, who
provided information to Mr. Boegli knowing he was working on Mego's stretch
project, had signed employment agreements prohibiting such conduct, and
Mr. Boegli knew this. Mr. Boegli himself was concerned about the possibility
that Kenner would sue him as a result of his activities on Mego's behalf.
The Court further finds that Mego's purpose in associating itself
with Mr. Boegli was that it believed he knew or could obtain Kenner's confidential
information, and that Mego knew that Mr. Boegli was passing on to it confidential
information of Kenner which had been obtained improperly. Therefore,
the Court finds that the Kenner information referred to which was obtained
by Mego as previously set forth was knowingly and willfully misappropriated
by Mego.

VI.

One of Mego's first objectives in producing its stretch doll was to determine
generally a method of manufacture for its stretchable toy figures and to
determine roughly whether the capital costs were within its capacity. Although
this information could have been [*21] obtained by conducing its
own engineering studies, Mego did not do that. Instead Mr. Rotenberg
told Mr. Boegli to provide the information, believing that Mr. Boegli knew
or could find the requested information on the basis of what he had done
for or who his contacts were with Kenner. Mr. Boegli did promptly
provide this information in the form of memoranda. The memoranda provided
two essentials of Kenner's manufacturing process, the major items of equipment
used, the identification of important suppliers and the capital cost date
for the items of equipment.

Mego made use of this information to its competitive advantage. For
example, [specifics deleted] CPG submitted comparative photographs of their
filing system and of Mego's and the two systems appear extremely similar,
the only exception being [specifics deleted]

Mego also received information from Mr. Boegli regarding Kenner's material
costs. Kenner's cost sheet, which was found in Mego's files during
the course of discovery for this litigation, contained Kenner's actual unit
cost figure for the entire unit as well as a breakdown of material costs
for packaging, sub-assemblies and individual components. Mr. Rotenberg
[*22] readily admitted use of this cost data.

It appears that Mego's process for the manufacture of its stretchable toy
figures in several of its essential aspects was derived from or based on
information received from Kenner. This information was confidential
and was knowingly and intentionally obtained from Kenner by improper means.
The information was used to Mego's competitive advantage.

Thus plaintiff has established facts which persuade the Court that it is
likely to succeed on the merits of this case on its unfair competition count.
The Court finds that plaintiff has also established that it will be
irreparably injured if a preliminary injunction does not issue.

Plaintiff showed that, following the introduction of Kenner's line of stretchable
toy figures in 1976, it entered into license agreements with a number of
corporations in foreign countries which conveyed the rights to manufacture
and sell the stretch toy figures along with the information as to how to
manufacture them. In 1978, a Mexican corporation located in Mexico,
Lili Ledy S.A. de C.V., began manufacturing and selling stretch toys in
Mexico under the license. It has agreed to maintain Kenner's manufacturing
[*23] information about the dolls in confidence and to pay Kenner
a royalty.

Mego began manufacturing its competing stretch toy figures in April 1979
at its Bretwood, New York, plant, where all of its stretch figures sold
to date have been manufactured. However, Mego has been negotiating
with a Mexican firm concerning the producton of Mego's stretch dolls in
Mexico. Mego is willing to and intends to transfer the technical information
used by it in its manufacturing process to the Mexican firm. The parties
agree that there is no remedy in Mexico for misappropriation of the trade
secrets.

Mego's contemplated transfer of information to Mexico will include transfer
of confidential information it misappropriated from Kenner. Mego is
also contemplating manufacturing the stretch toys in Taiwan, Hong Kong,
and/or Korea, which would also include transfer of Kenner's confidential
information. Once transfer of this information out of this country
occurs, the information could be published and Kenner would have no legal
recourse. Any trade secrets of Kenner's which now exist would be
destroyed.

The Court finds that exportation of the technology for making Mego's stretchable
toy figure [*24] is likely to place such information in the public
domain, and that such an occurrence would cause plaintiff irreparable harm.

The Court finds that an injunction against Mego from further manufacture
or sale of the product in the United States under these circumstances to
be unnecessary. Plaintiff has an adequate remedy at law should defendant
manufacture or sell more stretch toy figures which were or are developed
by a process which makes use of information improperly derived from plaintiff.
Defendant is enjoined, however, from disseminating information regarding
its production line or its methods of production used in manufacturing the
elastic figures, and is further enjoined from selling the production equipment
for the stretch toy as an entity such that it could be used again for the
purpose of producing stretch figures.

The consideration of the public interest favors the injunction sought, since
Ohio law actively discourages unauthorized use of trade secrets by making
such activity criminal.

With respect to enjoining Mego against exporting technology relating to
the stretchable toy figures, or otherwise further disclosing it here or
abroad, the balance weighs in plaintiff's [*25] favor because failure
to grant the injunction would permit the irrevocable destruction of the
confidentiality of plaintiff's information. Entry of such injunction,
on the other hand, would at most delay Mego's exportation or negotiations
therefor.

Conclusions of Law

The Court has jurisdiction over the parties in respect to plaintiff's unfair
competition claim, and venue is properly laid in the Southern District of
Ohio.

* * *

An action for trade secret misappropriation raises under and is controlled
by state substantive law. Kewanee Oil Company v. Bicron Corporation,
416 U.S. 470, 181 U.S.P.Q. (BNA) 673 (1974). A federal court must
apply the substantive law of the state in which it is sitting, including
the choice of law rules applied by the forum state. Erie Railroad
Company v. Thompkins, 304 U.S. 64 (1938); Klaxon Co. v. Stentor Electric
Manufacturing Co., 313 U.S. 487 494, 49 U.S.P.Q. (BNA) 515, 515-516
(1941). [*26]

While Ohio generally ascribes to the rule of lex loci delecti, it
does not do so automatically. . . . Considerations of public policy
should accopany the judicial decision making process in conflict of laws
cases. . . . Factors to be considered, besides the place where the
injury occurred, are such things as the parties' residences and the plaintiff's
selection of the forum state, . . . and the balancing of government
interests as to the respective public policies involved and how they would
best be served. . . .

In the instant case, the trade secrets which defendant allegedly misappropriate[d]
were developed and maintained in plaintiff's Kenner facility located in
Ohio. Although the planning of the misappropriation of this information
and its utilization were carried out by [*27] defendants largely
in New York, the physical misappropriation and the transmittal of the information
took place in Ohio. Plaintiff, a resident of Minnesota, chose to bring
this action in Ohio, against defendant, a New York corporation, notwithstanding
that both states have a substantial inteest in policing trade secret misappropriation.
A consideration of all of these factors leads to the conclusion that
the trade secrets issues in this action are governed by Ohio law, the place
where plaintiff chose to bring the action, where its facility is located
where the information that is the subject of this action was developed and
maintained, and from where the information was actually taken.

In any event, the courts of both New York and Ohio have adopted § 757 of
the Restatement of Torts and the definition of trade secrets found therein.
See, e.g., Kewanee Oil Company v. Bicron Corp., supra
at 474-75 . . . . [*28] . . .

* * *

Trade secret law is based upon protection against breach of faith and reprehensible
means of learning another's secret and thus does not require the kind of
novelty, uniqueness and invention which is a requisite of patentability.
. . . Structural Dynamics Research Corp. v. Engineering Mechanics
Research Corp., 401 F. Supp. 1102, 1117-18 (E.D. Mich. 1975). While
novelty in a patent law sense is not required for a trade secret, some novelty
is required in the sense of showing that the process is not common general
knowledge. [*29] Kewanee Oil Company v. Bicron Corp.,
416 U.S. 470, 476, 181 U.S.P.Q. (BNA) 673, 676 (1974). A new combination
of known stpes or processes can be entitled to trade secret protection.
See . . . Structural Dynamics Research Corp. v. Engineering
Mechanics Research Corp., supra, at 1117-18;Clark v. Bunker,
453 F.2d 1006, 1009, 172 U.S.P.Q. (BNA) 420, 422-423 (9th Cir. 1972). Thus,
trade secret protection can and should be extended to information which,
even though known per se, is put into combined final useful form by the
trade secret holder to his competitive advantage. Structural Dynamics
Research Corporation v. Engineering Mechanics Research Corporation,
supra at 1117-18; Clark v. Bunker, 453 F.2d 1006, 1009, 172
U.S.P.Q. (BNA) 420, 422-423 (9th Cir. 1972).

The "secrecy" requirement in trade secret law is not a demand of absolute
secrecy. Basically, the courts are concerned with whether the trade
secret owner has taken "reasonable measures" to protect his confidential
information. E.I. duPont deNemours & Co., Inc. v. Christopher,
431 F.2d 1012, 1017, 166 U.S.P.Q. (BNA) 421, 425 (5th Cir. 1970), cert.
denied, [*30] 400 U.S. 1024 (1971); K-2 Ski Co. v. Head Ski
Co., Inc., 506 F.2d 471, 474, 183 U.S.P.Q. (BNA) 724, 726 (9th Cir.
1974). If a supplier is given access to a purchaser's trade secrets
for the purpose of permitting the supplier to better fill the purchaser's
needs, such secrets are deemed to be received in confidence by the supplier
and the supplier is under a duty not to disclose the purchaser's trade secrets
to another or to apply those secrets to manufacture the products of another.
. . . The promotion of commercial ethics is a theme running throughout
the cases in the area of trade secret law, including in the determination
of the nature of plaintiff's trade secrets and whether they are protectible.
. . . Kewanee Oil Company v. Bicron Corp., supra at 487.
. . When information in the nature of a trade secret is procured by
improper means, the fact that the information [*31] conceivably could
have been obtained by lawful means is irrelevant. . . .

On the basis of the applicable law, and the facts found by the Court, the
Court further finds that plaintiff's information pertaining to its cost
data, its [specifics deleted] filling operation for the stretch figures,
and the combination of all of the factors involved in its production line
were trade secrets in the sense that they were not common knowledge in the
industry, that plaintiff maintained this information under measures reasonably
designed to protect it so that plaintiff could continue to use it to its
competitive advantage, and that defendant wrongfully procured this information
in order to achieve a competitive advantage in producing its own line of
stretch [*32] figures. The Court further finds that defendant
did use the information wrongfully procured in the manufacture of its stretch
toys.

There are four factors which should be considered in deciding a motion for
a preliminary injunction: (1) the likelihood of success on the merits at
trial; (2) the irreparability of harm to the plaintiff; (3) the balance
of injury between the parties; and, (4) the impact of the ruling on the
public interest. . . . No one of these factors is controlling, nor
is each necessarily to be given equal weight. Rather, the Court must
balance all of these factors in arriving at its determination. . . .

With respect to the requirement that plaintiff show a likelihood or succeeding
on the merits,

"[I]t is not necessary that the plaintiff's right to a final decision,
after a trial, be absolutely certain, wholly without doubt; if the other
elements are present (i.e., the balance of hardships tips decidedly toward
plaintiff), it will ordinarily be enough that the plaintiff has raised
questions going to the merits so serious, substantial, difficult and doubtful,
[*33] as to make them a fair ground for litigation and thus for
more deliberate investigation."

In the instant case, the defendant is no longer using the information appropriated
from plaintiff in its manufacture or sale of the stretch figures in the
United States, since its manufacturing and selling of these items has virtually
ceased due to lack of market demand. Even if the defendant should
manufacture or sell more stretch toys, the Court does not find that injunctive
relief is proper, since plaintiff would have an adequate remedy at law in
damages. However, the Court does find that should defendant export
any of the technical material it misappropriated from plaintiff or impart
[*34] any of this information to foreign corporations, plaintiff's
trade secrets would be threatened with destruction, for which it would have
no adequate remedy. In view of this threat of irreparable harm to
the plaintiff, the fact that plaintiff has demonstrated a substantial likelihood
of success on the merits at trial, and the strong public interest against
misappropriation of trade secrets, Ohio Rev. Code § § 1333.51 and 1333.99,
and the fact that the balance of injury between the parties weighs heavily
in favor of the plaintiff, this Court finds that defendant must be enjoined
from exporting technology relating to the stretchable toy figures or otherwise
disclosing it here or abroad.